The Top 10 Aerospace and Defense Stocks of 2011

What a crazy year it's been for investors. The S&P 500 jumped up more than 8% by May, only to turn around find itself down more than 10% in August, mainly a result of the European debt crisis and Washington's inability to agree on a solution to our debt dilemma. Now, at the end of December, the S&P has fought back and is poised to end the year essentially flat.

But while the markets as a whole didn't change much over the past 52 weeks, there were certainly companies that proved to be much more resilient and were able to post some impressive gains.

Here's a look at 2011's top 10 performers in the aerospace and defense industry.

Source: S&P Capital IQ. Includes only companies listed on U.S. exchanges that contain a market capitalization greater than $500 million. Returns as of Dec. 23, 2011.

Clearly, the big story for defense companies is the looming budget cuts that could reduce military spending by nearly $1 trillion over the next 10 years if sequestration cuts are implemented. That is potentially devastating for some of these companies, particularly the smaller defense contractors that are more reliant on their revenues from the Department of Defense.

Luckily for these companies, they do have some major players on their side battling these cuts. Defense Secretary Leon Panetta called the cuts a "doomsday scenario," and in its 2013 budget, the DoD is accounting for only a total of $489 billion in cuts over the next decade. (And it's only when you're talking about Washington that you'll hear "only" and "$489 billion" in the same sentence.)

Regardless, it may be unlikely that we'll see a resolution until after 2012's presidential elections. Both parties will want to use the looming cuts as a campaign issue, and that may leave only two months after the election to tackle the problem before $500 billion in automatic cuts are implemented on Jan. 1, 2013.

A year of uncertainty could have fewer companies investing in military spending. It also could help the better-diversified aerospace and defense companies to outperform their peers in 2012. Boeing, for example, got a comparatively small 43% of its revenues in 2010 from the U.S. government and can make up for any cuts to defense programs in part with revenues from its booming commercial-airline business.

Honeywell (NYSE: HON), whose stock gained 3% this year, is another company that's well diversified and can handle defense cuts better than its smaller peers can. Of its $33.37 billion in revenues in 2010, just 13% came from the U.S. government.

Other companies that managed to eke out small gains for the year were BE Aerospace (Nasdaq: BEAV) and Spirit AeroSystems (NYSE: SPR), which returned 5.1% and 1.5%, respectively.

The world's largest defense contractor, Lockheed Martin, had a bumpy ride in 2011. After beating earnings estimates in its first and second quarter, things seemed to be going well for the defense giant. But when the debt crisis hit, Lockheed's shares plummeted more than 17% in just two weeks at the end of July and the beginning of August.

The company has recovered nicely and has continued to land huge defense contracts, most recently winning the right to supply Japan with 42 fifth-generation stealth F-35 fighter jets. That deal alone could be worth $6 billion to $8 billion, huge for Lockheed as the company braces for increasing Pentagon budget cuts in the future.

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